Monday, 30 June 2025

GST compliance in related party transactions

GST compliance in related party transactions



Dealing with GST in business is like navigating a roadmap with lots of signs and signals. When it comes to related party transactions – basically, business deals with family members, friends, or companies you have a close connection with – it gets even more complicated. It’s imperative to get this right because non-compliance with GST compliance in related party transactions can lead to tax troubles and strained business relationships.

Imagine you run a business and often deal with companies owned by your relatives or close friends. In these cases, you’re not just thinking about profit and loss, but also about balancing personal relationships with professional responsibilities. This is where understanding the regulations of GST on related party transactions becomes essential. GST regulations are applied uniformly, irrespective of whether business transactions are conducted with unrelated entities or with familial connections. They mandate adherence to the same set of rules for all transactions, emphasizing compliance without distinction.

In this blog, we’re going to break down what the GST regime holds for these kinds of transactions. Whether you’ve been in business for years or are just getting started, it’s important to know how to handle these situations. We will discover how GST applies to related party transactions in a way that’s easy to understand and practical. We’ll look at some common scenarios, point out potential pitfalls, and offer tips on how to stay on top of your GST obligations.

Understanding GST and Its Application

The Goods and Services Tax (GST) represents a significant shift in how taxes are levied and collected. Introduced to create a unified tax structure, GST has streamlined various indirect taxes under one umbrella. Understanding its application, especially in the context of Related Party Transactions, is quintessential for businesses aiming for compliance and financial prudence.

GST, implemented in India in July 2017, subsumed multiple taxes like VAT, Service Tax, and Excise Duty into a single tax system. This move aimed to eliminate the cascading effect of taxes and create a more seamless national market. For businesses, this meant a complete overhaul of their tax reporting and compliance mechanisms.

GST and Its Application to Related Party Transactions

When it comes to Related Party Transactions and GST, the rules are quite specific. As per GST laws, a related party transaction is any transfer of goods or services between related entities, which could be companies under common control or where family members are involved in management or ownership. GST on Related Party Transactions is determined based on the nature of the transaction and the relationship between the entities involved.

GST implications for Related Party Transactions often revolve around how these transactions are valued and recorded. The transactions must be valued at an ‘Arm’s Length Price’ – the price that would be charged to an unrelated party under similar circumstances. This ensures that transactions are fair and market-based, preventing tax evasion through transfer pricing.

Examples of Related Party Transactions

Example 1: Consulting Services Between Parent and Subsidiary Companies

Imagine a parent company offering consulting services to its subsidiary. Even if these services are provided free of charge, for GST purposes, they need to be valued as if they were sold to an outsider. GST then applies to this ‘market value’.

Example 2: Property Leasing Between a Firm and Its Director

If a business is renting property from one of its directors, the rent charged must be in line with what would be charged to an unrelated tenant. This ensures that the transaction is fair, and GST is properly applied.

Ensuring Compliance and Transparency

It’s important for businesses to record these transactions accurately, reflecting the true market value. This is a prerequisite for adhering to GST compliances in Related Party Transactions. Given the complexities involved in any business scenario involving RPT, it’s often wise for businesses to consult with tax professionals to ensure they are fully compliant with GST laws regarding these transactions.

Identifying Related Party Transactions Under GST

Related parties, as defined in section 2(84) of the CGST Act, are identified in the following scenarios:

When an individual serves as an officer or director in one business and also holds a similar position in another business.

When businesses are officially recognized as partners.

In cases where an employer-employee relationship exists.

If a person owns, directly or indirectly, at least 25% of the shares in another company.

When one party has direct or indirect control over the other.

If both parties are governed by the same controlling authority or management.

When together, the entities exert control over another entity.

If the business’s promoters or managerial personnel are part of the same family.

Understanding and identifying Related Party Transactions under GST is imperative for ensuring GST compliance in business operations. These transactions, often complex, can have significant GST implications for Related Party Transactions. Let’s understand the criteria, types, and challenges associated with these transactions.

Criteria for Related Party Transactions Under GST

Definition Under GST: A related party transaction typically involves businesses that are connected through family, management, or capital. Under GST, these are broadly defined to include transactions between holding companies and subsidiaries, associates, and key management personnel and their relatives.

GST on Related Party Transactions: These transactions are carefully scrutinized under GST laws. The focus is on ensuring that the transactions are conducted at arm’s length, meaning the value of the transaction should reflect a fair market price, as if the parties were unrelated.

Breakdown of Different Types of Related Party Transactions

Sales and Purchases of Goods and Services: This includes any sale or purchase of goods or services between related entities. For instance, a company selling products to its subsidiary would fall under this category.

Loans and Financial Transactions: Financial transactions like loans or advances between related parties also come under the purview of GST. The interest rates and terms of these transactions need to mirror what would be expected in transactions with unrelated parties.

Property Leases and Rentals: Leasing or renting of property between related entities is another common type of related party transaction. The rent or lease amount should align with the going market rates to adhere to GST norms.

Challenges in Identifying and Categorizing These Transactions

Complex Ownership Structures: One of the biggest challenges is resolving complex ownership structures to determine if entities are related. This can be particularly challenging in large conglomerates with multiple layers of subsidiaries and associate companies.

Valuation of Transactions: Assigning a fair market value to transactions between related parties can be subjective and challenging. Ensuring that these valuations meet the arm’s length standard and are compliant with GST laws is important.

Maintaining Documentation: Adequate and accurate documentation is essential for GST compliance in Related Party Transactions. This includes contracts, agreements, and correspondence that justify the transaction values and terms.

Impact of Related Party Transactions on GST

Effect on GST Calculations

Related Party Transactions under GST often involve complex calculations. The GST levied depends on the transaction value, which must reflect an arm’s length price. If a business undervalues a service or product provided to a related entity, it can lead to underpayment of GST, skewing the entire tax calculation process.

Legal and Financial Implications

Mismanagement of these transactions can lead to legal consequences, including penalties and audits by tax authorities. GST compliance in Related Party Transactions is critical to avoid these risks. If transactions are not recorded at arm’s length prices or if GST is inaccurately calculated, it can result in significant financial liabilities.

Exemptions and Special Considerations

Understanding Exemptions in GST for RPTs

There are certain exemptions and special considerations within the GST framework for Related Party Transactions. These can include transactions that are non-commercial in nature or those that fall under specific thresholds defined by GST laws.

Impact on Business Strategies

Knowing these exemptions allows businesses to strategize effectively. For instance, structuring transactions to legally leverage these exemptions can result in tax savings and more efficient financial planning.

Managing Exemptions Effectively

To utilize these exemptions without breaching compliance, businesses should maintain thorough documentation, seek expert advice, and stay updated on GST regulations. Understanding the exemptions in GST on Related Party Transactions is key to effective management.

Challenges and Risks Associated

1. Identifying Risks: One of the primary challenges in GST compliance in Related Party Transactions is accurately identifying whether a transaction falls under the related party criteria. This often involves complex legal and financial assessments, especially in large or multinational corporations.

2. Valuation Challenges: Valuing goods and services in a manner compliant with GST regulations can be challenging. The risk lies in the subjective nature of valuation, which can lead to discrepancies and potential disputes with tax authorities.

3. Effective Risk Management Strategies: Regular audits, clear internal guidelines, and training for staff involved in these transactions are essential. Additionally, consulting with GST experts and leveraging technology for accurate record-keeping can mitigate risks associated with Related Party Transactions and GST.

4. Maintaining Transparency and Documentation: Accurate documentation is critical in GST compliance for Related Party Transactions. The challenge lies in maintaining transparent records that clearly demonstrate the arm’s length nature of transactions. Failure to do so can raise red flags during audits, leading to legal complications.

5. Understanding and Adapting to Regulatory Changes: The GST framework is subject to periodic updates and changes. Staying abreast of these changes and understanding how they impact Related Party Transactions is a challenge for businesses. Adapting to these regulatory shifts promptly is crucial to avoid non-compliance.

6. Dealing with Cross-Border Transactions: For multinational corporations, cross-border related party transactions add another layer of complexity. These transactions must comply not only with Indian GST laws but also with international tax regulations. Understanding and reconciling these different requirements pose a significant challenge.

7. Technology Integration and Data Management: Leveraging technology for managing and analyzing transaction data is essential. However, integrating the right technology that can handle the complexities of GST on Related Party Transactions is a challenge. Ensuring that the chosen technology aligns with the compliance requirements and effectively manages data is vital.

8. Managing Stakeholder Expectations: Balancing the expectations of various stakeholders, including shareholders, tax authorities, and related entities, while ensuring GST compliance in Related Party Transactions is a delicate task. It requires a strategic approach to ensure all parties are informed and satisfied.


Sunday, 11 May 2025

ITC Under GST

ITC Under GST

Not eligible
S. No. Items Exceptions
1 Motor Vehicles Except in cases:

“Extended supply of such vehicles or conveyances;”

“Transportation of passengers”
2 Other Conveyances “Providing training on driving, navigating such vehicles”

“Conveyances for transportation of goods”

“Motor vehicles for transportation of persons having an approved capacity of more than thirteen persons including driver when they are used for business purposes”

“Buses for pick and drop of employees (if approved capacity is more than 13 persons including driver) – part of above.”
3 Insurance, repairs and maintenance for motor vehicles and conveyance are not allowed “Except where an inward supply of goods or services or both of a particular category is consumed by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply”

“ITC is available in respect of food and beverages or health services where the provision of such goods or services is obligatory for an employer to provide to employees under any law for time being in force.”
4 Membership in a Health Centre “Only allowed under this head if ITC on vehicles are allowed;”

“If the ITC on any type of vehicle is not allowed, then the cost of insurance, repairs and maintenance for such vehicles is also not allowed.”
5 Membership of a Club,
6 Membership in a Fitness Centre;
7 Works contract services when supplied for the construction of an immovable property
7 Rent-a-cab, Life Insurance, Health Insurance “Gifts to employees are exempted from GST up to a value of Rs 50,000 per employee – Schedule I of CGST Act, 2017 (Refer Sec 7)”
8 Travel benefits extended to employees on vacation such as leave
9 Travel benefits on home travel concession (LTA)
11 “Except where it is an input service for the extended supply of works contract service and plant and machinery” Goods or services or both received by a taxable person for the construction of an immovable property
12 “Gifts to employees is exempted from GST up to a value of Rs 50,000 per employee – Schedule I of CGST Act, 2017 (Refer Sec 7)” “Except goods or services received on his own account including when such goods or services or both are used in the course or furtherance of business and plant and machinery”
13 Goods or services or both on which tax has been paid under section 10; ie. Under section 10 composition scheme
14 Goods or services or both received by a non-resident taxable person “Except on goods imported by him”
15 Goods or services or both used for personal consumption
16 Goods lost
17 Goods written off
18 Goods destroyed
19 Goods stolen
20 Goods disposed of by way of gift or free
samples “Gifts to employees are exempted from GST up to a value of Rs 50,000 per employee – Schedule I of CGST Act, 2017 (Refer Sec 7)”
21 Any tax paid in accordance with the provisions of sections 74, 129 and 130. I.e. In Fraud, Misstatement, etc.

ITC Eligible
Companies claim ITC solely for commercial endeavours. This rule excludes expenses for personal use, exempt goods, or goods not eligible for ITC claims. Companies can use ITC to purchase raw materials, packing materials, spare parts, consumables, printing, and stationery items.
Claim ITC on capital goods such as:
Plant and machinery
Support structures used for plant and machinery
Motor vehicles used for transportation of goods
Repairs required for such transporting trucks
Electronics, furniture, appliances, etc.
Taxpayers can get tax credits for various expenses. It includes cleaning, rent, internet, cell phones, bank fees, repairs, advertising, legal fees, and conferences.
Common Credit in ITC
A company may acquire capital goods, input commodities, and services from outside sources. Additionally, it may use the items and services acquired for private or commercial purposes. Under GST, businesses know the aggregate input tax credit on all such purchases as Proportionate Credit or Common Credit. The taxpayer cannot claim credit for inputs utilised for private purposes. Therefore, you should apply the standard credit when paying the production tax liability.
Utilise the standard credit under two fundamental criteria:
1. You can use ITC only for commercial purposes, not for personal use of goods and services.
2. ITC is eligible only for selling taxable goods and services.
3. ITC does not apply to exempted supplies.

Saturday, 19 April 2025

GST on software – Goods or Services?


GST on software – Goods or Services?



Some of us may argue that transfer of software is a “supply of goods” and others may treat it as “supply of service”. Can such transfer of software be considered as supply of goods in one situation and “supply of services” in another? 

Clarification provided by Government on classification of computer software

The Central Board of Indirect Taxes and Customs (‘CBIC’) vide FAQs dated 15.12.2018 at Q. No. 17 had clarified that ‘Development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software shall be treated as supply of services as per No. 5 (2)(d) of Schedule –II of the GST law’. SAC 9983 

CBIC vide its sectoral FAQs on Information Technology (‘IT’) and IT enabled services had reiterated that in terms of Schedule II of the CGST Act, ‘upgradation and implementation of information technology software or permitting the use or enjoyment of any intellectual property right are treated as services. But, if a pre-developed or pre-designed software is supplied in any medium/storage (commonly bought off-the-shelf) or made available through the use of encryption keys, the same is treated as a supply of goods classifiable under heading 8523.’

Ministry of Finance (Department of Revenue) Letter D.O.F No. 334/1/2008 – TRU dated 29.02.2008 – softwares are categorized as ‘normal software’ and ‘specific software’. Normalised software is mass market product generally available in packaged form off the shelf in retail outlets. Specific software is tailored to the specific requirement of the customer and is known as customized software. 

Thus, basis the aforesaid clarifications, it can be concluded that if a computer software is procured off-the-shelf or made available through encryption keys, then the same qualifies to be supply of goods. However, in any other case, supply of computer software is classified as supply of services under the Goods and Services Tax Act.


Can a Software Programme be termed as “Goods” under GST Law?

Let us understand the above-mentioned question having regard to the rate of GST.

1. Notification No. 1/2017-IT (Rate), read with Notification No. 1/2017-C.T. (Rate), if pre-developed or predesigned software is supplied in any medium / storage (commonly) brought off-the-shelf) or made available through the use of encryption keys, the same is treated as a “supply of goods” classifiable under the Heading 8523 of the above notification and tax shall be charged at the rate of 18%.

2. Notification No. 17/2017-C.T.(Rate) read with notification no. 8/2017-IT (Rate), “supply of services” of the description as specified hereunder, falling under heading 9973, shall be levied at the rates specified below:

i. Temporary or permanent transfer or permitting the use or enjoyment of Intellectual Property (IP) right in respect of goods other than Information Technology Software – tax rate @ 12%.

ii. Temporary or permanent transfer or permitting the use or enjoyment of Intellectual Property (IP) right in respect of goods other than Information Technology Software tax rate @ 12%.


Information Technology Software:

a. Let us understand the meaning of Information Technology Software. It means any representation of instructions, data, sound or image, including software code and object code, recorded in a machine readable form and capable of being manipulated or providing inter activity to a user by means of a computer or an automatic data processing machine or any other device or equipment – para 4, explanation (v) of Notification No. 11/2017-CT (Rate) and No. 8/2017-IT (Rate) both dated 28-6-2017 effective from 1-7-2017.

b. The term “Intellectual Property Rights (IPR)” has not been defined in GST Law, M.F. (D.R.) Circular No. 82/8/2004-TRO dated 10-9-2004 states as follows:

“Intellectual property emerges from application of intellect which may be in the form of an invention, design, product, process, technology, book, goodwill etc. legislation in India is made in respect of Intellectual Property Rights (IPRs) such as patients, designs, trademarks and copyrights.

Can the Software be treated as “Goods” or “Services” in GST?

A software is an intellectual property having value. GST law does not recognize or make distinction between tangible and intangible property. Under GST law, the definition of “goods” makes it clear that all property whether tangible or intangible capable of being moved would fall within the definition of goods. Goods has following attributes: (a) utility (b) capable of being bought and sold (c) capable of being sold, transferred, delivered, stored and possessed.

If a software whether customised or non-customised satisfies the attributes mentioned above, the same could be treated as “Goods”. It is very essential for an article to be termed as “Goods”, it is its marketability.

It is important to note that when a person purchases a software programme especially canned software implanted in some tangible medium, he does not become owner of such software programme, but only a license holder, i.e., he is not entitled to use, enjoy the software embedded in the said media, he cannot use of its own will.

Refer: Tata Consultancy Services Vs. State of Andhra Pradesh (2004) 178 ELT 22 (SC). The said judgment is discussed below:

Tata Consultancy Services v. State of Andhra Pradesh

Appellant provided consultancy services including computer consultancy services. They used to prepare and load on un-canned software and also cell canned software. Appellants were licensees with permission to such license these packages to others.

The software is classified into two parts, namely canned software and customized software. Canned software means a software that is designed and created for sale to more than one person and is designed in such a way that large number of people can use it’s on a variety of hardware and it is also called “Packaged Software” or “Normal Software” or “Branded Software”. On the other hand, customized software means the software created for a single person or a specific customer to meet the specific requirement and it is also called as “Tailor made Software” or “Specific Software (Refer: Infotech Software Dealers Vs. Uol). The Commercial Tax Officer, Hyderabad, passed a provisional order of assessment under the provisions of Andhra Pradesh General Sales Tax Act, 1957 holding that the software was goods.

The question that was raised in this appeal was whether the canned software sold by the Appellant could be termed to be “goods” and as such assessable to sales tax under the said Act.

Arguments of the Appellant:

Appellant submitted before the Hon’ble Court that the term “Goods” defined in Section 2(h) of the Act include tangible moveable property and the words “all materials, articles and commodities also cover only tangible moveable property”.

The said Act defined as “Canned Software” as under:

“Canned Software” means that is not specifically created for a particular consumer. The sale or lease of, or granting a license to use, canned software is not automatic data processing and computer services but is a sale of tangible personal property. When a Vendor, in a single transaction, sells canned software that has been modified or customized for that particular consumer, the transaction will be considered the sale of tangible personal property, if the charge for modification constitutes no more than half of the price of the sale.

The matter came before Supreme Court – The observations of Hon’ble Supreme Court – The following issue was Hon’ble Supreme Court. Whether or not a software programme (which by its very nature is incorporated and intangible) which had become an inextricable part of the disc would fall within the definition of the terms “Goods” so as to attract AP sales tax?

Hon’ble Supreme Court observed that we are not concerned with a programme which is not a part of the disk, but a programme contained in a disk.

Observations by S.N. Variava J

The term “goods” as used in Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of moveable properties, whether tangible or intangible. Hon’ble Court was in agreement with the observations made the Court in Associated Cement Companies Ltd. A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marked, it becomes goods which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (in case of paintings) or computer discs or cassettes, and marked would become “goods”, we see no difference between a sale of software programme on a CD/floppy disc from a sale of music on a cassette / CD or sale of film on a video cassette in all such cases, the intellectual property has been incorporated on a media for the purposes of transfer sale is not just of the media which by itself has very little value. The software and media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music of films, the buyer is purchasing the intellectual property and not the media, i.e., the paper or cassette or disc or CD. Thus, a transaction sale of computer software is clearly a sale of “goods” within the meaning of the term as defined in the said Act. The term “all materials, articles and commodities” includes both tangible and intangible / incorporated property which is capable of obstruction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes.

Observations by J.S.B. Sinha

The definition of “goods” in sale of Goods Act is also of wide import which means every kind of moveable property. Property has been defined therein to mean the general property in goods and not merely a special property. It is not much in dispute that “goods” would comprehend tangible and intangible properties, materials, commodities. If a distinction is sought to be made between tangible and intangible properties, materials, commodities and articles and also compared and in compared materials, the definition of goods will have to be re written of comprising tangible goods only which is impermissible. This Court, therefore, will have to confine itself to the question as to whether the concerned software would come within the purview of “goods”. In the constitution, goods as such are not defined. An expansive definition with the said expression has been given which is indicated by the expression “includes” such an expression is also of wide amplitude. It is true that Court found that Computer Software. It is true that in CompuServe, Inc (supra), the Court found that the computer software developed by the Appellants therein was intangible property, but a perusal of the said judgment shows the other views of the other Courts were noticed therein wherein computer software was held to be a tangible property on the ground that the computer programmes was coded on a tangible medium such as a computer tape.

The definition of goods in the said Act does not merely include personal chattels but all articles, commodities and materials. The definition of goods in the said Act was wider in term than in the sale of Goods Act, 1979 and the supply of Goods and Services Act, 1982. Furthermore, here, we are not concerned with a programme which is not a part of the disk but programme but programmed contained in the disk.

A software may be intellectual property, but such personal intellectual property contained in a medium is bought and sold. It is an article of value. It is sold in various forms like floppies, disks, CD-ROMs, punch cards, magnetic tapes etc. Each one of the mediums in which the intellectual property is contained is a marketable commodity. They are visible to senses. They may be a medium through which the intellectual property is transferred but for the purpose of determining the question as regards leviability of tax under the fiscal statute, it may not make a difference. A programme containing instructions in computer language is subject matter of a license. It has its value to the buyer. It is useful to the person who intends to use the hardware, viz., the computer in an effective manner so as to enable him to obtain the desired results.

Hon’ble Supreme Court made the observations that in situations where a software programmes through electronic medium / internet satisfies the prerequisites / attributes of goods which are:

a. Its utility.

b. Capable of being bought and sold, and

c. Capable of transmitted, transferred, delivered, stored and possessed on the point of determination of “Goods” and therefore, such supply should be treated as “supply of goods” instead of “supply of services”. However, at this juncture, it is important to advert to Schedule II of the CGST Act which classifies certain activities or transactions as “supply of goods” or “supply of services”. As per para 5(c) of the Schedule II of the CGST Act, following two activities relating to “Intellectual Property Rights (“IPR”) shall be taxable as “supply of service”.

i. Temporary transfer of IPR by the owner or such IPR to any person for a consideration, or

ii. Permitting the use or enjoyment of any IPR by the owner of such IPR to any person for a consideration.

Moreover, as per para 5(d) of the Schedule II “Development, Design, Programming, Customisation, Adoption, Upgradation, Enhancement or Implementation of Information Technology software shall be treated as “supply of services”.

Therefore, from the above discussion, following conclusions may safely be drawn.

a. Supply of canned software (which invariably contains EULA through electronic medium / internet would always be treated as “supply of service” as per Schedule II, para 5 (c).

b. Supply of canned software (which invariably contains EULA) through tangible medium like CD/DVD/ Pen Drive might be treated as “Supply of Goods” as per decision of the Hon’ble Supreme Court in TCS v. SOAP. Interestingly, though the CGST Act defines development of software as “Service” software in physical form (branded as well as tailor made), “Information Technology Software” is goods in Customs Tariff Act under heading 8523 80 20.

c. Supply of customized software through any medium would be treated as “Supply of Services” as per Schedule II, para 5(d). However, supply of software which is not designed and developed specific to any customer and sold without any customization, qualifies as “Supply of Computer Software as Goods” classifiable under Heading 8523 (refer in 2020 (36) G.S.T.L. 411 (AAR GST – Kar.) / [2020] 118 Taxmann.com 98 (AAR Karnataka).

It would be worthwhile to note the following:

i. Temporary or permanent transfer of IPR falls in service classification under Section 7 of the Act and Heading 9973, which covers renting and leasing services.

ii. Software in physical form is “goods” and has classification in GST Tariff Heading 8523 80 20. Software, service in non-physical form comes under service group 9973, licensing services for right to use computer software and data bases falls under service tariff 997331.

iii. Permission to allow brand name would be classified as “supply of services” as “Intellectual Property Service” to licensee / manufacturer and brand owner will be liable to pay service tax (now GST). C.B.E. & Co. Letter No. 249/1/2006-CX-4 dated 27th October, 2008 (20 STT 16 (St.) (Clarification in respect of alcoholic liquor, but principle applies in all cases. Refer Hero Honda Motors v. CST 21 Taxmann.com 117 = 2012 (27) S.T.R. 409 (Tribunal).

iv. Temporary or permanent transfer or permitting use or enjoyment of Intellectual Property Rights (IPR) in respect of goods (other than software) falls under service heading 9973, whereas temporary or permanent transfer or permitting use or enjoyment of Intellectual Property Rights (IPR) in respect of software falls under service group 99733.

Temporary Transfer of IPR (other than software) is service. The GST rate of 12% (6% CGST and 6% SGST/UTGST) or 12% IGST. Permanent transfer of IPR (other than software) is “goods” and GST rate is 12% (6% CGST plus 6% CGST / UTGST) or 12% IGST. The HSN classification is “Any chapter Sr. No. 243 of Schedule II of Notification No. 1/2017 – CT (Rate) both dated 28th June, 2017 inserted with effect from 15th November, 2017.

However, Temporary or permanent transfer of IPR of software or permitting the use or enjoyment of IPR in respect of Information Technology software is service. The GST rate is 18% or 18% IGST vide Sr. No. 17(ii) of Notification No. 11/2017-C.T. (Rate) and No. 8/2017 I.T. (Rate) both dated 28th June, 2017.

Conclusion

The above-mentioned law relating to transfer of software programme is complicated and unfriendly for the taxpayers. It will affect adversely the liquidity of taxpayers to the extent of restrictions and obstacles.


Saturday, 15 March 2025

GTA Under GST

GTA Under GST


Goods Transport Agency (GTA): The transportation services of goods by road under Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 (sr.no.18), are free from GST Services (Heading 9965):

(a) By road except for the services of:

A goods transportation agency

A courier agency

(b) By internal waterways.

Latest Update

54th GST Council Meeting – “To clarify that when ancillary/intermediate services are provided by GTA in the course of transportation of goods by road and GTA also issues consignment notes, the service will constitute a composite supply and all such ancillary/intermediate services like loading/unloading, packing/unpacking, transhipment, temporary warehousing etc. will be treated as part of the composite supply. If such services are not provided in the course of transportation of goods and invoiced separately, then these services will not be treated as a composite supply of transport of goods.”

The GSTN has introduced the much-awaited feature to file Annexure-V online on the GST Portal. This option is specifically designed for newly registered Goods Transport Agencies (GTAs) opting for Forward Charge.  

CBIC has notified the Goods Transport Authorities (GTAs) that they are exempt from yearly GST declarations under forward charge on the recommendation of the 50th GST Council meeting. 

An advisory on the submission of the declaration in Annexure V by the Goods Transport Agency (GTA) opting to pay tax under the forward charge mechanism.  

Tax payment advisory for (GTA) Goods Transport Agencies under the forward charge mechanism is now available at the government’s official portal. 

GST rates for Good Transport Agencies (GTA) have been amended by the CBIC department w.e.f. 18th July 2022. 

Thus, it is to be considered as the transportation of goods by road, unless it is showcased as a service under a GTA (goods transportation agency), it will not attract GST.

Under GST laws, the Goods Transport Agency (GTA) is defined in clause (ze) of notification no.12/2017-Central Tax (Rate) dated 28.06.2017. (ze) ‘goods transport agency’ is explained as a person who bestows service about the transport of goods by road and produces consignment notes, by whatever name called.

Thus, the issuance of a consignment note is considered essential for a supplier of service to be recognized as a GTA. In case, the service provider did not issue such a consignment note, the transporter will not fall under the guidelines of the goods transport agency. Further, the absence of a consignment note for any goods hints the transporter has possession of the goods and is responsible until the goods are safely delivered to the consignee.

What is a Consignment Note?

There is no mention of consignment note neither in the Act nor in the notification no. 12/2017-Central Tax (Rate). For information, one can go through the meaning of the consignment note ascribed to the term under the Explanation to Rule 4B of Service Tax Rules, 1994. it defines a consignment note as a document provided by a goods transport agency against the receipt of goods for the transport of goods by roadways in a goods carriage.

The document contains details like serial number, name of the consigner and consignee, registration number of the carriage of the goods in which the goods are transported, details of goods being transported, details of the place of origin and destination, and the person who will be liable for the service tax payable from the consignor, consignee or the goods transport agency.

GST Rates on Services Offered by GTA

Following notification no. 11/2017-Central Tax (Rate) dated 28.06.2017 as modified by notification no. 20/2017- Central tax (Rate) dated 22.08.2017, sr.no. 9 and sr. no. 11, (i) Services of goods transport agency (GTA) in accordance with the transportation of goods (comprising household goods utilized for personal use) (Heading 9965 &9967 respectively) employs GST @2.5% or 6% CGST.

Also, similar rates are exerted for SGST, which turns the effective GST tax rates to 5% or 12%. However, a condition implies for the rate of 5% which bounds the taxpayers that he cannot claim input tax credit levied on goods or services used in supplying the service.

Further notification explains that 

(a) credit of input tax levied on goods or services utilized exclusively in the procurement of such service has not been accepted; and 

(b) credit of input tax credit levied on goods or services consumed partly for procurement of such service and partly for other impacted supplies eligible for input tax credits, its reversal proves such supply of service as an exempt supply and attract the rules under provisions of subsection (2) of section 17 of the Central Goods and Service Tax Act, 2017.

If the goods transport agency chooses to pay central tax at 6% the applied cumulative GST will be 12% in this criteria and the paid central tax for all the services supplied by GTA will be 6%. furthermore, the GTA would be able to claim ITC, if this option is being provided.

Thereby, in case the GTA is not liable to take advantage of ITC for the supplies belonging to it and the accountability under GST is remitted under reverse charge basis, the receiver of GTA service releasing the tax liability is permitted to take Input Tax Credit (ITC) of the amount of tax paid under reverse charge, issued it is utilized in the course or development of business at his end.

However, on a forwarding charge basis, the receiver would further be able to take advantage of the ITC of the GST paid by GTA. Notification no. 11/2017-Central Tax (Rate), sr.no.11, (ii) also assigns that associated services in transport other than those reported in (i) (Heading 9967) would charge GST @9% CGST. The SGST would also attract identical rates, which would result in the effective rate applicable at 18%. Similar rates are also applicable for services falling under heading 9965 in terms of notification no. 11/2017-Central Tax (Rate), sr.no. 9 (v).

Who is Liable to Pay GST on GTA Services (5% Rate – No ITC – RCM-7 Recipients)

The responsibility of paying GST for the supply of services by a goods transport agency (GTA )is transferred to the recipients who have not levied central tax at the rate of 6%, regarding transportation of goods by road (in terms of notification no. 13/2017-Central Tax (Rate) dated 28.06.2017 (sr.no.1) as corrected by notification no. 22/2017-Central Tax (Rate) dated 22.08.2017, if the receivers (placed in the taxable territory) fall in the following category:

Any factory listed under or regulated by the Factories Act, 1948(63 of 1948); or

any society indexed under the Societies Registration Act, 1860 (21 of 1860) or under any other rule applicable for few times in any part of India; or

any cooperative society settled by or under any rule; or

if any person has registration under the Central Goods and Services Tax Act or the Integrated Goods and Services Tax Act or the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act; or

anybody corporate settled, by or under any law; or

any companionship if registered or not under any law comprising an association of persons; or

any random taxable person.

Thus, if any of the above-mentioned categories of persons avail the services of GTA in the taxable territory the GTA supplier can pay GST (and avail ITC) @ 12% (6% CGST = 6% SGST): if the GTA does not opt for paying tax (and avail ITC), the receivers will be eligible to pay GST. If the recipients do not fall in the above-mentioned categories, the responsibility of paying GST will be of the supplier of GTA services.

GTA Services Exempted from GST

Notification no.12/2017-Central Tax (Rate) dated 28.06.2017 (sr.no.21), exempts below-given services by a GTA (Heading 9965 or 9967) from payment of tax: Services provided by a GTA, via transport in a goods carriage:

(a) Agricultural Yield

(b)  Salt, Milk, Food Grains like Rice, Flour, and Pulses

(c) Organic Manure

(d) Registered newspapers or magazines with the Registrar of Newspapers.

(e) If any relief material is being transported for the victims of natural or man-made disasters, calamities, accidents or mishaps

(f) Defence or military equipment

Notification no.12/2017– Central Tax (Rate) dated 28.06.2017 (sr.no.22) which exempts GTA for the services given below:

Services are provided on a hiring basis

A mode of transportation of goods for a goods transport agency

i.e., in case of hiring of a means of transportation from the GTA, no GST will apply to such transactions.

Importance of ‘in Relation to’ Term in the Definition of GTA

The term ‘in relation to’ in the definition of the GTA extends the scope from the actual transportation of goods to any other service provided like packing/unpacking, loading/unloading, temporary warehousing, trans-shipment, etc. If these services are not offered independently and are provided as the successful provision of GTA Service, they will fall under GTA.

Conclusion: The overall discussion clarifies that not all the transport of goods by road is by GTA. The services are from GTA only when the GTA issues a consignment note mandatorily. The services provided by GTA will fall under the GST otherwise if a person provides the services of transportation are exempted from the GST.

Furthermore, if the persons from specified categories supply the service of GTA in the taxable territory, the receivers who get such services become liable to pay GST instead of the supplier of services, but the GTA remains liable for collecting and payment of tax @ 12% (6% CGST + 6% SGST).

In other situations, where GTA service is utilized by persons other than those mentioned, the GTA service supplier will be liable to pay the GST. Also, he won’t be able to take ITC benefits on input services utilized by him if tax is levied at 5% (2.5% CGST + 2.5% SGST). If the GTA service provider rents any means of transport to offer his output service, no GST will be charged on such inputs.

Notification no. 12/2017-Central Tax (Rate) dated 28.06.2017 (sr.no.21A)-clarifies GTA services as exempted to unregistered persons.

Crux

There is no need for registration if the GTA is offering services at 5% without ITC benefit, which means endowing exclusively RCM supplies.

There is a need for registration if surpasses the 20L limit (40L is for retailers of goods not for services)

there is the provision of exemption if GTA transporting specific goods or if supplying services to an unregistered person.

The Recipient from specified categories will only be availed with the RCM facility with condition GTA providing supply @5%.


Sunday, 2 February 2025

Employer and employee under GST

Employer and employee under GST


When a person enters into a contractual agreement with other person (which may be body corporate/ firm/ Individual/ etc) to perform or work as per the directions issued by the other person, the person who is performing the activities gets remuneration in consideration & it can be considered that he is in employment of the other person & this relationship is called employer employee relationship.

From the above it can be concluded that to establish employer employee relationship there should be-

1. Employers (who provide the employment & pay salary to employees).

2. Employee (who works as per the directions/instructions of the employer).

3. Contractual agreement between the employer and employee


GST taxability in case of employer employee relationship-

In Schedule III (Sec 7 CGST Act,2017) activities shall not be treated as either supply of goods or supply or services. Activities mentioned in Schedule III are out of ambit of CGST Act,2017. Entry no. 1 of Schedule III is mentioned below-

♦ Services by an employee to the employer in the course of or in relation to his employment.

The aforesaid entry of schedule III clearly specifies that any services provided by an employee to his employer in the course of or in relation to his employment is out of the ambit of GST. 

Here it is very pertinent to note that services that are only provided in the course of or in relation to his employment is to be considered as out of the purview of GST, all other services provided by an employee to his employer which are not in the course of or in relation to his employment shall not be excluded from the GST & shall be considered in the ambit of GST.

For e.g. - Mr. A who is in employment of XYZ limited (in short employer) provides HR services to the employer as per agreement & in consideration gets monthly salary of Rs 1 Lacs. So, HR services provided by Mr. A to his employer is in the course of his employment & the same is in ambit of Schedule III of GST. Hence no GST shall be applicable on this transaction.

Now Mr. A who is an employee of XYZ limited is also supplying goods to XYZ limited, now that supply of goods by Mr. A is not in relation to his employment, hence not covered by Schedule III of CGST act, 2017. So, GST shall be levied here.

From the above it can be concluded that only those transactions which are performed in the course or relation of employment is only under purview of Schedule III of CGST act,2017.

In Schedule I (Sec 7 CGST Act,2017) activities are considered as supply even if made without consideration. Entry no. 2 of Schedule I is furnished below-

Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:

Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.

From the above proviso reading it can be understood that any gift provided by the employer to his employee shall be taxable under GST if the value of gift is exceeding Rs 50,000 in a financial year, however where the value of gifts is up to Rs 50,000 GST shall not be levied & transaction will remain out of ambit of Schedule I.

Now if we read schedule III in tandem with schedule I it can be clearly understood that when there is an employee employer relationship GST shall not be levied & if any gift is provided by employer to his employee & the value of gift exceeds Rs 50,000 in a financial year GST shall be applicable on the gift value, otherwise GST shall not be levied.

Now we will cover few circulars which has provided clarifications on issues related to the employer employee relationship-

Circular No. 172/04/2022-GST dated 06 July 2022-

Issue- Perquisites provided by the employer to its employee in terms of contractual agreement entered into between the employer and the employee are liable for GST.

Clarification - Perquisites provided by the employer to its employee which are in terms of contractual agreement between the employer & the employee, will not be subject to GST by the virtue of Schedule III.

Circular No. 178/10/2022-GST dated 03 August 2022-

Issue - Forfeiture of salary in the event of the employee leaving employment before the minimum agreed period.

Clarification - Notice pay recovery is not done due to tolerating an act but as penalties for dissuading the non-serious employees from taking up employment and to discourage and deter such a situation. Therefore, such forfeiture is not considered taxable under GST as consideration is not for tolerating an act or situation.

In matter of Manappuram Finance Ltd. Vs Assistant Commissioner of Central Tax and Excise (High court of Kerala) it was affirmed that notice pay recovery should not be taxed under GST. Also, it was held that Circular No. 178/10/2022-GST is binding on the department. Circular is clarificatory in nature & it is to apply retrospectively.

Thus, from the above reading it can be concluded that GST shall not be levied on services which are performed by an employee for his employer which is in the course of or in relation to his employment. Also, GST shall be applicable on any service provided outside employment by employee to employer.

Supply Taxability Remarks

Gift by employer Exempted upto Rs.50000/- per year Schedule: I

Service provided by employee to employer in relation to the employment Neither supply of goods nor services Schedule III

Using of company asset by employee for personal purpose Supply of service taxable in the hands of employer if provided without consideration Schedule I

Sale / Transfer / disposal of business assets by employer to employee with or without consideration (laptop, car, mobile, furniture) Taxable supply in the hands of employer Schedule I

Sale / Transfer / disposal of business assets by employer to employee with or without consideration on which ITC availed (laptop, car, mobile, furniture) Taxable supply in the hands of employer Schedule I read with valuation rule 28 will apply.

Employee of parent company providing service to the subsidiary or associate company Taxable service in the hands of employer As the subsidiary or associate are different company with PAN it is liable for GST

Services provided by Director to a company provided the payment made to him treated as professional charges and not salary Taxable under RCM Sec 9(3) Schedule I Circular 140/10/2020 Dt.10-6-2020)

Reimbursement of bills or allowances (TA/Conveyance/Medical/ Telephone bill / Member ship fee. Not taxable if provided as terms of employment

Comfort, convenience or welfare of the employee Not taxable This has been held by the Hon’ble Bombay high court (Nagpur bench), in its order dated 11.10.2010, in the matter of Central Excise, Nagpur Vs. M/s Manikgarh Cement [2010 (20) S.T.R.456 (Bom)].

Guest house provided by employer to employee as well non – employee Not an activity of furtherance of business, hence not taxable as well no input tax credit. Not eligible for ITC [Order No.02-03/ODISHA-AAAR/ 2018-19 Dated 21.01.2019].

Free cab Not taxable

Free Food Not taxable

Notice pay recovery Not taxable

Medical insurance, health checkup, relocation benefits, Personal accident insurance, Not taxable





Tuesday, 14 January 2025

Detention of goods under GST

 Detention of goods under GST

Detention of goods in transit-What to expect when your goods are detained or seized while in transit

Navigating the GST law in India: What to expect when your goods are detained or seized while in transit

Imagine this: you're a busy business owner, your goods are on their way smoothly, and suddenly, they're halted by GST officials. It's a twist you didn't expect, right?

Welcome to the world of GST—a law that was promised to be Good and Simple! While it is good as it consolidated fragmented multiple markets across States into one market, it has not lived up to its promise of being simple.

This law that can catch you off guard, especially when your goods are stopped or seized while in transit.

Despite its intention to streamline India's indirect tax system, the GST law has introduced a new layer of complexity for businesses. The process of detaining and seizing goods in transit often reveals the practical challenges in balancing strict compliance with the law and the day-to-day realities of running a business. This tension between law enforcement and business operations becomes even more pronounced when minor clerical errors result in significant penalties, suggesting that the "simple" part of GST still has a long way to go.

For every business owner, understanding GST isn't just important—it's essential. If you're dealing with goods in transit, don't risk getting caught off guard by the complexities of the law.


Dive in now to arm yourself with the knowledge you need to navigate GST with confidence!

A. INSPECTION OF GOODS AND VEHICLES IN TRANSIT

Section 68 of the CGST Act, 2017 - It empowers the GST authorities to inspect the vehicles in transit and requires the person in charge of a vehicle carrying any consignment of goods of value exceeding INR 50,000 to produce the documents carried in connection with the said goods.

Rule 138B and 138C of the CGST Rules, 2017- They empower the GST authorities to intercept any vehicle to verify the e-way bill or other relevant documents.


B. DETENTION, SEIZURE, AND RELEASE OF GOODS AND VEHICLES IN TRANSIT

Section 129 of the CGST Act, 2017 -It deals with the detention, seizure, and release of goods and vehicles in transit. If goods are transported without proper documentation or in violation of the law, they can be detained or seized. Such goods shall be released only on payment of a penalty or furnishing of a security deposit.

Rule 138A of the CGST Rules, 2017 -It requires the person in charge of a vehicle carrying goods valued above INR 50,000[1] to carry the following documents

Invoice or bill of supply or delivery challan

E-way bill in physical or in electronic form or E-way bill mapped to radio frequency identification device

A copy of the bill of entry in case of movement of imported goods from a port or airport or land customs station


GST Circular number 41/15/2018 dated April 13, 2018

It clarified the procedures concerning the interception of vehicles for inspection of goods in movement and the detention, release, and confiscation of such goods and vehicles. It provides guidelines related to the documentation required, the role of officers, and applicable penalties for any failure to comply with the provisions laid down in the CGST Act during the transit of goods.

C. How to deal with detention or seizure while in Transit?

No penalty in case of clerical errors as clarified by CBIC Circular No. 64/38/2018-GST

CBIC has explicitly clarified that proceedings under section 129 of the CGST Act may not be initiated, inter alia, in the following situations:

1. Spelling mistakes in the name of the consignor or the consignee but the GSTIN, wherever applicable, is correct.

2. Error in the pin-code but the address of the consignor and the consignee mentioned is correct, subject to the condition that the error in the PIN code should not have the effect of increasing the validity period of the e-way bill.

3. Error in the address of the consignee to the extent that the locality and other details of the consignee are correct.

4. Error in one or two digits of the document number mentioned in the e-way bill.

5. Error in 4- or 6-digit level of HSN where the first 2 digits of HSN are correct and the rate of tax mentioned is correct.

6. Error in one or two digits/characters of the vehicle number.

In case of the above situations, a penalty to the tune of Rs. 500/- each under section 125 of the CGST Act and the respective State GST Act should be imposed (Rs.1000/- under the IGST Act) in FORMGST DRC-07 for every consignment

The most common issues dealt with by the taxpayers; and judgments of the High Courts while dealing with such issues are discussed below:

1. Is a penalty justified for mere technical errors in an e-way bill if no intention to evade tax is established?

No, penalties are not justified for mere technical errors in an e-way bill if no intention to evade tax is established.

2. What happens if a notice for penalty under Section 129 is issued after a period of 7 days from the date of detention?

The order of detention is not valid and liable to be set aside if the notice for penalty under Section 129is issued after the period of 7 days from detention

3. Does a minor discrepancy in vehicle details in an e-way bill attract proceedings for penalty

No, a minor discrepancy in vehicle details in an e-way bill would not attract proceedings for a penalty 

4. What if the respondent authorities fail to prove any mensrea (i.e. criminal intent) for tax evasion?

If the respondent authorities fail to prove any mensrea for tax evasion, order imposing penalty liable to be set aside

5. Is merely not extending the e-way bill validity sufficient for a penalty under Section 129(3)?

No, merely not extending the e-way bill validity is insufficient for a penalty under Section 129(3) without the intent to evade tax.

6. What penalty is imposed if a vehicle breakdown prevents the update of an e-way bill and there is no intent to evade tax?

The penalty order is to be set aside and a general penalty of INR 25,000 under Section 125 of the CGST Act, 2017, may be imposed on the assessee.

7. Are tax and penalty demand valid if neither the invoice nor the e-way bill were accompanying goods at the time of interception but were produced subsequently?

Yes, the order of demand of tax and penalty is valid and just in law if the documents are produced subsequently

8. Can search and seizure of a godown result in penalty proceedings under Section 129?

No, search and seizure of a godown cannot result in penalty proceedings under Section 129

9. Is a penalty justified under Section 129(3) for not filling up Part 'B' of an e-way bill if the error is technical and without intent to evade tax?

No, a penalty under Section 129(3) is not justified if the error is technical and without intent to evade tax

10. What is the initial burden of proof for clerical or typographical errors in e-way bills?

The initial burden of proof lies on the GST authorities to demonstrate an intention to evade tax; penalties should only be imposed for intentional tax evasion, not inadvertent errors.

11. Is there a penalty to be refunded if the e-way bill expires but there was no intention to evade tax?

Yes, the penalty deposited for the expiry of an e-way bill should be refunded if there was no intention to evade tax.

12. What happens if there is a vehicle number mismatch on the e-way bill due to a replacement truck after a breakdown?

The tax and penalty demand under Section 129 should be set aside if the discrepancy is deemed a minor error per Circular No. 64/38/18, warranting a penalty of INR 25,000 under Section 125 of the GST Act

13. Adoption of an alternate route for delivery of goods-

No penalty can be levied for choosing a circuitous route in preference to a linear one if the travel time and destination point remain intact

14. Can a penalty under Section 129(3) be imposed solely due to a mismatch in dispatch address, despite no other discrepancies between the E-way bill and invoice?

Penalty cannot be imposed solely due to mismatched dispatch address

15. Can be goods and vehicles of the purchaser be detained for default committed by the supplier (not related to current shipment) in the supply chain?

No, the goods/vehicles of the purchaser cannot be detained as long as there is no non-compliance with E-way bill rules.

16. Can goods be detained on the ground that the consignment of heavier goods or with a short distance was not offloaded first as against the lighter consignment or a longer distance?

It is not mandatory that the consignment of heavier goods or short distances must be offloaded first.

On a reading of the above, the single important the High Courts have held is that no penalty under Section 129 (3) (which is 200% of the GST involved) can be imposed for clerical errors or minor deviations, as long as there is no criminal intent to evade payment of GST

While taxpayers whose goods or vehicles are detained for clerical errors or minor deviations, can seek relief from the Court's law upon proving the absence of intention to evade, such an exercise is expensive and time-consuming. Therefore, the taxpayers should leave no stone unturned to ensure compliance with the E-way bill regulations discussed above.

Practical tips to avoid detention or seizure while in Transit

1. Ensure E waybill is generated for every movement of goods irrespective of the threshold

2. Use software for generating E waybill (which integrates into the accounting software) as against using a government portal

3. Prepare an SOP containing the list of documents to be carried by the person in charge of vehicle for various scenarios like sales, sales returns, purchase returns, import of goods, stock transfer, etc

4. Conduct periodic training for the supply chain teams to ensure 100% compliance with E waybill rules, non-compliance of which will have a disastrous effect on the business

5. Wherever the transporter customer or supplier is responsible for generating E waybills, incorporate appropriate clauses in the contract, to offload liability of penalty, interest, fine, etc on account of non-compliance with E waybill rules onto them.


Sunday, 15 December 2024

Financial Services under GST

Financial Services under GST



Financial Services: 

Financial services are the economic services provided by the finance industry, encompassing a wide array of organizations that manage money. This includes but is not limited to credit unions, banks, credit card companies, insurance companies, accountancy firms, consumer finance companies, stock brokerages, investment funds, and government-sponsored enterprises. These services play a crucial role in helping individuals and businesses manage their financial resources effectively, fostering growth and success.

GST and Financial Services

The Goods and Services Tax (GST) introduced in India has significantly impacted the financial services sector. GST is an indirect tax that has replaced many previous indirect taxes in India. It is divided into several tax slabs, with each product or service falling under a specific slab. Financial services, under the GST regime, attract a standard rate of 18%, classified under the SAC (Services Accounting Code) 9971. This unified tax structure aims to bring about transparency and simplicity in tax administration, impacting the pricing, operations, and profitability of financial services.

Types of Financial Services Affected by GST

Banking Services: These include traditional banking operations, loan and credit facilities, and other related financial solutions provided by banking institutions.

Investment Services: This category covers services related to the management, advisory, and handling of investments and assets.

Insurance Services: Insurance services encompass the provision of various insurance policies designed to protect individuals and businesses against potential risks and financial losses.

Accounting Services: Accounting and bookkeeping services involve maintaining and auditing financial records, tax filings, and financial planning and analysis.

Financial Planning Services: These services help individuals and organizations in planning their financial futures through investment strategies, tax planning, estate planning, and retirement planning.

Real Estate Services: This includes services related to the buying, selling, leasing, or renting of real estate properties.

Stock Brokerage Services: Stock brokerage services involve the buying and selling of stocks and other securities on behalf of clients.

Commodity Brokerage Services: Similar to stock brokerage, this involves the trading of commodities, such as metals, energy, and agricultural products, on behalf of clients.

Impact of GST on Financial Services

The implementation of GST at a standard rate of 18% for financial services, with a unified SAC code of 9971, has streamlined the tax structure but also posed challenges and complexities, especially in terms of compliance and operational adjustments. Financial institutions now face the task of realigning their service charges, understanding the tax implications on inter-state services, and ensuring compliance across all states in which they operate.

Banking Services Under GST

Banking services, the backbone of the financial sector, have seen a significant transformation with the introduction of GST. Banks offer a plethora of services, ranging from account maintenance, loans, and credit facilities to asset management.

Under the GST regime, these services are taxed at a standard rate of 18%. This uniform tax rate applies across the spectrum of banking services, simplifying the previously complex tax structure that varied from one service to another. However, this also means an increase in the cost of banking services for consumers, as the GST rate is higher than the previous service tax rate of 15%.

One of the critical challenges for banks under GST is the requirement for pan-India registration. Given their widespread operations across states, banks need to ensure compliance in every state they operate in, significantly increasing their administrative burden. Additionally, transactions between branches, often considered a routine internal process, are now taxable under GST, adding another layer of complexity to their operations.

Taxable services

Services provided to Reserve Bank of India

Bank Guarantee Commission Charges

Processing Fees on Loans

Inspection Charges

Documentation Charges

Issuance of Letter of Credit

Ledger Folio Charges

Credit Card Services

Demand Draft Charges

Intermediary Services

Issuance of Bank Statement Charges

Interest on Gold Loan

Standing Instruction Charges

Loan takeover charges

Charges on Cheque Bouncing

Sale of Repossessed Assets

Exempt Services

Interest/ Discount on Loans / Deposits or Advances

Repos and Reverse Repos transactions

Invoice / Cheque or Other Similar Discounting

Income From Commercial Paper or Certificate of Deposit

Collateralised Borrowing and Lending Obligations (CBLO) Transactions

Interest on Financial Lease

Sale of Derivative

Future Contracts

Investment Services Under GST

Investment services, including investment management, advisory, and brokerage services, also fall under the 18% GST slab. This encompasses services provided by stock brokerages, investment funds, and financial advisors, among others. The SAC code for all these services is 9971, aligning them under a single tax bracket and simplifying the process of tax filing and compliance.

The implementation of GST has necessitated a re-evaluation of pricing strategies for investment service providers. Given that the tax burden on these services has increased, providers must decide whether to absorb this additional cost or pass it on to their clients. This decision is critical in maintaining competitiveness in the market, especially when attracting and retaining clients.

Challenges and Solutions

Challenge: The increased administrative burden of complying with GST regulations across multiple states. Solution: Banks and investment service providers are increasingly adopting advanced IT and software solutions to automate and manage GST compliance efficiently. Leveraging technology for compliance management can significantly reduce the time and resources dedicated to these tasks.

Challenge: The need to revise pricing strategies due to the higher GST rate. Solution: Service providers in the banking and investment sectors are exploring ways to enhance the value of their offerings, incorporating additional services or benefits that justify the increased costs to consumers.

Insurance and Accounting Services Under GST

Insurance Services Under GST

Insurance services, which play a crucial role in providing financial security, are taxed at 18% under GST. This rate applies to all types of insurance, including life, health, and property insurance. The uniform tax rate simplifies the tax structure for insurance companies, but, similar to banking and investment services, it has led to an increase in the cost of insurance for policyholders.

Insurance companies now face the challenge of explaining this increase to customers, many of whom are accustomed to the pre-GST rates. Moreover, the need for nationwide compliance and the management of inter-branch transactions add to the operational complexities of insurance companies under GST.

Accounting and Bookkeeping Services Under GST

Accounting and bookkeeping services, essential for businesses to maintain accurate financial records, also attract an 18% GST rate. This includes services such as tax filing, financial auditing, and consultancy, provided by accountancy firms and individual accountants. The application of GST on these services has necessitated adjustments in billing and service contracts, with firms now required to include GST in their fees.

The primary challenge for accounting service providers is ensuring that their clients are fully aware of the GST implications on the services they receive. Educating clients about GST compliance and its benefits, such as the availability of input tax credit (ITC), is crucial for maintaining transparent and trust-based relationships.

Challenges and Solutions

Challenge: Increased cost of services due to the application of GST. Solution: Service providers, including insurance companies and accounting firms, are enhancing their service offerings to add more value. This may involve providing additional support, advisory services, or leveraging technology to offer more efficient and cost-effective solutions.

Challenge: Nationwide compliance and management of inter-branch transactions under GST. Solution: Adopting centralized GST compliance management systems and utilizing cloud-based accounting and ERP software can help manage the complexities of nationwide compliance and inter-branch transactions effectively.

Conclusion

The introduction of GST has undeniably streamlined the tax structure for financial services in India, bringing uniformity and simplification to a sector characterized by its diversity and complexity. While the shift to a single tax rate has presented challenges, particularly in terms of increased service costs and compliance burdens, it also offers opportunities for service providers to innovate and enhance the value of their offerings. Through strategic adjustments, technological adoption, and a focus on client education, the financial services sector can navigate the GST landscape successfully, contributing to its growth and the broader economy.


GST compliance in related party transactions

GST compliance in related party transactions Dealing with GST in business is like navigating a roadmap with lots of signs and signals. When ...